BROKERS’ NOTES: Buy Kaap Agri, sell Northam Platinum

BUY: Kaap Agri 

Many farming areas of South Africa have had a lot of healthy rain. Kaap Agri is an agricultural services group which is fairly exposed to the agricultural cycle. We are in the third year of the La Niña cycle, which generally results in a good crop in South Africa and lower than average rainfall in other regions. So we tend to generate some high crop yields when other parts of the world aren’t producing. As a result, we get good terms of trade. Kaap is well exposed through granaries as well as through providing services to farmers in terms of supplies and financial services. It trades on a low p:e and a high dividend yield; it’s got good medium-term earnings prospects and looks attractive.

SELL: Northam Platinum 

Northam has increased the cash portion of its offer to Royal Bafokeng Platinum shareholders, so it is really stretching its balance sheet to buy RBPlat, probably at a peak in the cycle. Generally companies overpay for large acquisitions — so most of the benefits accrue to the old shareholders in terms of value created. We think it may struggle to extract a return. And it means the prospects for dividends for the next three to five years have significantly diminished. It will also distract management from the job at hand. We worry that this may be destroying value.